Issue Forfeiture and Reissue of Shares: Rules & Journal Entries

A defaulting shareholder fails to pay the subscription amount of shares, the company will forfeit such shares, which will then be offered to the public for reissue. Shares can be forfeited at par or forfeited at a premium. Every public firm has multiple owners. You must have heard that these companies are listed on the country's stock exchange, and anyone can buy their shares. The technical term for the ownership of any firm is shares. A firm's share is a unit of equity ownership of that particular firm. The capital, the money or assets available with a firm, is divided into units. These units are transferable shares and can be held by people or corporations. Therefore, anyone holding firm shares is thus a partial owner. The process of obtaining and selling these shares is issue, forfeiture, and reissue of shares. 

Share Capital is a crucial feature of a firm's functions. It is also an integral topic in the commerce subject of the UGC NET Commerce Examination. This topic will help you learn how a firm's share capital functions and its impact on the business. Understanding the process of issue forfeiture and reissue of shares is essential for commerce students as it forms the foundation of equity capital management in corporate accounting.

You will learn about the following:

• Issue Forfeiture and Reissue of Shares Meaning
• Issue Forfeiture and Reissue of Shares Journal Entries
• Issue, Forfeiture, and Reissue of Shares Problems
• Issue vs. Forfeiture vs. Reissue
• Corporate Accounting Issue Forfeiture and Reissue of Shares

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Issue Forfeiture and Reissue of Shares Meaning

The cycle of issue forfeiture and reissue of shares reflects how companies manage shareholder compliance and optimize their capital structure through strategic share management. The details of the issue forfeiture and reissue of shares have been stated below.

The issue of Shares is the action through which a company issues newly created shares to allocate them to its current and new shareholders. The assignment of these newly issued shares to existing shareholders can be for different purposes, like huge capital for financing the expansions, repayment of some debts accrued by the company, or accomplishing working capital availability. The extent to which shares are important financially would be defined by the demand they would create for the respective organizations among those companies that intend to raise capital. Shares are issued for generating money needed for improvement, managing liquidity, and increasing visibility within the market, despite associated costs and regulatory obligations.

Forfeiture of Shares

Forfeiture of Shares is the process in which a company cancels the shares held by a shareholder due to failures in payment of amounts that are due, for example allotment money or call money. When a shareholder does not pay these amounts even if called upon, the company forfeits the shares, resulting in the shareholder losing ownership and financial interest in the shares. Forfeiture of shares is one of the most important corporate actions that firms take to enforce discipline in the payment of due amounts by shareholders. Companies can thus maintain financial health and ensure fairness among all shareholders while pursuing a structured and transparent process.

Reissue of Shares

A company can reissue shares when those shares were forfeited by virtue of the original shareholders failing to pay their dues. The reissue, therefore, allows a company to collect dues that were not collected earlier and optimize its capitalization. A vital aspect of reissue of shares is that it is one of the financial mechanisms used by the company to recover unpaid capital related to forfeiture. Therefore, working through the orderly issuance of shares in fully compliant manner will not only ensure recovery of dues, but would also lead to optimum utilization of capital, thereby enhancing the financial standing and operational efficiency of the entity.

Fig: issue forfeiture and reissue of shares

Issue Forfeiture and Reissue of Shares Journal Entries

These journals are majorly important for understanding the accounting treatment in books for issue forfeiture and reissue of shares and how they influence equity-related accounts. Journal entries concerning the issue, forfeiture, and reissue of shares are very essential in financial accounting. Here are the detailed procedures and relevant entries:

Issue of Shares

Assume a company issues 1,000 shares with a face value of ₹10 each at par. The company receives the full amount.

Entry

Forfeiture of Shares

Assume a shareholder subscribed to 100 shares but failed to pay the final call of ₹4 per share. The amount paid per share was ₹6.

Initial Entries for Subscription and Partial Payment

On Application (₹3 per share)

Transfer from Application to Share Capital

On Allotment (Rs. 3 per share)

Transfer form Allotment to Share Capital

Final Call Not Paid (Rs. 4 per share):

Forfeiture of Shares

Reissue of Forfeited Shares

Assume the company reissues the 100 forfeited shares at ₹8 per share.

Entry for Reissue

Transfer of Forfeited Amount to Capital Reserve: Assuming Rs. 600 was originally forfeited

Journal entries for the issue, forfeiture, and reissue of shares ensure accurate tracking of financial transactions and compliance with accounting standards. While issuing shares increases the company’s equity capital, forfeiture, and reissue help in effective capital management and ensure that the company maintains financial integrity.

Issue, Forfeiture, and Reissue of Shares Problems

Solving numerical problems regarding forfeiture and reissue of shares is an effective way of strengthening the concepts and their accounting treatment in real-world corporate situations. This direct approach helps clearly articulate the entire conceptual framework and the corresponding accounting treatment for all transactions involving shares of issues, forfeiture, and reissue.

Problem 1: Issue of Shares

Scenario: ABC Ltd. issues 2,000 shares with a face value of ₹10 each. The payments are to be made in three installments: ₹3 per share on application, ₹4 per share on allotment, and ₹3 per share on final call. Record all the necessary journal entries.

Problem 2: Forfeiture of Shares

Scenario: DEF Ltd. issued 1,000 shares with a face value of ₹10 each. All payments were duly received except from one shareholder holding 100 shares, who failed to pay the final call of ₹3 per share. Make the journal entries for the forfeiture of these shares.

Problem 3: Reissue of Forfeited Shares

Scenario: DEF Ltd. reissues the 100 shares that were forfeited at ₹8 per share. Record the journal entries for the reissue and transfer of forfeited amount to capital reserve.

Issue vs. Forfeiture vs. Reissue

The principles of understanding the differences between share issue, forfeiture, and reissue are crucial for analyzing the life cycle of share capital in corporate accounting. Each of these stages corresponds to a distinct transaction in the finance world with different legal considerations, journalizations, and implications for the company's equity structure. A comparative study of all these three scenarios would help students to understand not only the accounting treatment but the strategic considerations involved in any given process, weighing the workload of theory- and problem-type questions seamlessly in UGC NET and other commerce exams.

Corporate Accounting Issue Forfeiture and Reissue of Shares

Corporate Accounting manages the shares or share capital of a company. All the present discussions will be related to the journal entries in a company concerning issue, forfeiture, and reissue of shares in its books. Issue, forfeiture, and reissue of shares should record every such transaction with great care. Therefore, the company's financial accounts are accurately recorded as per these transactions and thus perfect transparency regarding regulatory issues and confidence amongst investors. By accurately recording the transactions, they will be reflected correctly in the company's accounts and thus will improve the company's financial management and decision-making.

Conclusion

Mastering the concepts of issue forfeiture and reissue of shares goes a long way not only in general understanding of corporate finance, but also in exam-focused application. Forfeiture of shares and their subsequent reissue is an important topic in the corporate finance management of a company. Forfeiture occurs when a shareholder fails to pay the dues as specified by the company, thus losing their ownership rights and the paid capital associated with that ownership. The company can then proceed to reissue the forfeited shares to other investors, and in most cases, they are offered at a price lower than normal. Reissue helps a raising company gathering necessary funds, which guarantees that the shares will be held by those individuals who are able to meet their financial obligations. Understanding the legal and procedural frameworks surrounding these actions is pivotal for investors and corporate administrators alike to safeguard interests and maintain transparency in the financial system. Issue forfeiture and reissue of shares is a critical topic as per several competitive exams. It would help if you learned other similar topics with the Testbook App.